EXECUTIVE COMPENSATION REFORM NEEDS ACTION, NOT REACTION

“It is a notorious fact…that the typical American stockholder is the most docile and apathetic animal in captivity” – Ben Graham1

All attempts to reform executive compensation have been completely useless in the 21st century.  The march higher continues unabated at a compounding rate that would make Bernie Madoff proud.

The problem is that all battles to curb it, have been reactionary (not to mention tepid), say by voting “no” on a specific corporation’s CEO’s pay package for a given year. Here’s a perfect recent example:

More Pensions Funds Join Chorus Opposing GM’s Pay Package

“Chorus” that’s a perfect description of this toothless fight.  And what was the result of this chorus?

“In a largely symbolic vote, 38% of GM shareholders rejected a compensation plan at the automaker.”

Also, all twelve of the company’s candidates to the board were elected by shareholders with each receiving 96% of the vote.

The measures currently being used are the equivalent of using a thimble to put out a major forest fire – completely inconsequential.  The ability of corporate boards and executives to consistently end run these efforts, say by reducing a bonus by a million or two in a contested year, only to see it spring back in spades going forward, has given rise to Matt Levine’s first meta-rule of executive pay: “All executive-pay rules have the effect of increasing executive pay.”

Instead, it is time for shareholders to first put forth a systematic process to determine executive compensation.  Furthermore, it’s imperative that they set the narrative by putting forth a plan that by any other standards is overly generous.  With that in mind, here’s what I propose. Continue reading

  1. He does what the board of directors tell him to do and rarely thinks of asserting his individual rights as owner of the business and employer of its paid officers. The result is that the effective control of many, perhaps most, large American corporations is exercised not by those who, together, own a majority of the stock but by a small group known as “the management.” []

THE SKIM AND THE PARTIAL PONZI: PART II

Let’s start off with the definition of a Ponzi scheme:

“An investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.”

A Partial-Ponzi, is the lower than advertised Return On Capital (ROC)1 that most publicly traded corporations in America are achieving.

Though I previously highlighted a new phenomenon of disappearing earnings (45%), the real story is how money is being skimmed by the executives of corporate America, in return for which the rest of us are not really getting any value-added for this munificence.  While Wall Street gets the blame for financial excess and ruin (and ruinous practices)2, the major driver of income inequality is being led by publicly traded corporations – those supposedly owned by all of us in our savings and retirement accounts. Continue reading

  1. or similarly Internal Rate of Return (IRR), or the derivative but far from identical Return On Equity (ROE),  etc. []
  2. and maybe that’s really their purpose: taking the blame/flack []